By Sarah Ruef-Lindquist, JD, CTFA
The Tax Relief and Jobs Creation Act that was signed into law at the close of 2017 is touted as the most extensive tax reform legislation since the 1986 Tax Act, which I came to know early in my professional career as a lawyer and philanthropic advisor.
In the 1986 act, there was a lot we took for granted in the itemized deduction world, including the once sacred charitable income tax deduction for itemizers. Essentially losing that deduction because of the dramatic increase in the standard deduction has become cause for concern for the charitable sector. I’ve written before about why that might be misplaced, but I want to focus here on what strategies have not changed in that legislation that still are powerfully tax efficient giving strategies that support annual funds and planned giving alike.
For those age 70 ½ or older with IRAs they can give up to $100,000 total to charity or charities in any given year without having to recognize the income tax that would otherwise be payable on distributions. Why? Because a direct Qualified Charitable Distribution (QCD) can be excluded from income. That’s a significant amount of potential philanthropy. A donor could take advantage of the QCD method to make annual gifts, or a larger planned gift. I often advise clients who are eligible to do this kind of gifting even when itemizing the gifts for a deduction is an option, because it’s potentially more tax efficient.
When one receives a distribution from their IRA and then makes a gift from the proceeds on which they will be taxed, they may increase their Adjusted Gross Income in a way that exposes one to a higher level of income tax on Social Security Benefits. They may also bump themselves into a higher income and/or capital gains tax bracket. One of the best features of this strategy is that donors can use their Required Minimum Distribution (RMD) that they must otherwise withdraw from their IRA to make these gifts. The result? That income that was put aside without tax will become a charitable gift without deducting any tax, which many people find compelling.
If you are age 70 ½ or older, or work in development and have donors in this age demographic, consider the QCD option and what it could mean for you or your organization’s donors. As with all gifting strategies, be sure to obtain competent, independent legal and tax advice before making a significant charitable gift.
We have all heard the jokes about Maine weather, and none of us would be without the essentials: our snow shovel and an umbrella. The question is: Do you have the right kind of umbrella?
You are responsible for bodily injury, property damage and personal injury caused to another person by you, your dependents, even your pets. Your home and auto liability have limits to what and how much they will cover in the event that you are sued. A Personal Umbrella Policy not only raises the dollar limit above and beyond your current policies, but also broadens what will be covered.
This is the way it works: Let’s say your homeowners policy has a limit of $250,000. You have a pool and a neighbor’s child is injured while swimming.The neighbor sues you. The case is lost and your neighbor is awarded $400,000.
Your homeowners liability kicks in and pays your limit of $250,000. On top of that the policy pays the attorney fees you racked up to defend you in court. But what about the $150,000 not covered? If you have an umbrella policy, it kicks in where the homeowners left off and pays the balance of the award up to its limit. If you do not have enough coverage on your homeowners policy and if you do not have an umbrella, the remainder of the award comes from you. Your paycheck, your house, your car, your assets!
One of the best aspects of an umbrella policy is that because they do not start to pay until the limits of your home or auto policy have been exhausted, they are very reasonably priced. On average you can purchase a $1 million umbrella for less than $150 a year.That’s a little more than $12 a month.
Only you can make the decision that best suits your needs. Individuals with teenagers, pets, pools, who volunteer in civic groups or who own a business should give careful consideration to the need for additional liability coverage.
Sherree L. Craig, CEBS, senior account executive in the Insured Benefits Division at Allen Insurance and Financial, has achieved an Advanced Self-Funding Certification from the National Association of Health Underwriters.
The NAHU Advanced Self-Funding Certification ensures knowledge of regulatory concerns, service model options, cost-containment strategies and underwriting concepts necessary for providing advice and direction on employer self-funded health plans.
Craig has been with Allen Insurance and Financial for 20 years. She works with businesses across Maine on their employee benefits offerings.
“Employers have limited options to control their own health plan expenses with an insurance company. Self-funding is a valuable tool to consider for a company’s health plan strategy,” said Craig. “This certification allows me to better assist businesses who elect to self-fund their medical plans with using the most cutting edge cost-control techniques, while assuring that they are fulfilling their plan sponsor obligations.”
Deb McDonald, a business insurance account manager at Allen Insurance and Financial recently achieved the designation of Accredited Customer Service Representative in Commercial Lines from the Independent Insurance Agents & Brokers of America.
McDonald has been with Allen Insurance and Financial since 1995. She lives with her family in Union.
The ACSR designation program was developed to recognize the contribution made to each customer by the service they are provided through independent insurance agencies such as Allen Insurance and Financial.
Independent Insurance Agents & Brokers of America is the nation’s oldest and largest national association of independent insurance agents & brokers with more than 300,000 members. Find them online at independentagent.com.
By Sherree L. Craig, CEBS, Insured Benefits Division
Sherree L. Craig, CEBS
With a predicted medical trend increase of 6.5% in 2018 (PwC), businesses can expect to see a bump in their health insurance costs again this year.
Until the underlying issue of the cost of medical care can be controlled, company health insurance plans will be impacted with higher premium costs, reduced insurance protection and increased employee dissatisfaction with their benefits.
More businesses are exploring the opportunity to be creative with their company health plan offerings through a risk-mechanism called self-funding. What are they doing? They are paying for all of their employees’ health care with the assistance of a third party administrator (TPA), insuring only their highest cost claims with a stop-loss insurance policy. This way, they have several advantages over a fully insured health plan.
1. Removal of insurance company overhead costs
2. Reduced state premium taxes
3. Improved cash flow and,
4. Flexibility in plan designs and service offered.
This flexibility leads us into several strategic initiatives considered next generation for health plan cost control, and employers are adopting these innovative ideas to help reign in their medical spending.
All health plans are required to pay 100% for preventive services. How about removing all financial obstacles (co-payments and deductibles) for the treatment of the chronic conditions that lead to the largest medical costs down the line? With this concept, Value Based Plan Design” diabetics are getting proper testing and medications to prevent the catastrophic claim that is imminent without proper care.
Another tool being adopted by self-funded health plans is the reference-based pricing model. A reference price (the most that will be paid) is determined for a treatment, either by a percentage of the allowable Medicare payment (i.e., what the federal government has to pay for that service) or by a study of comparable pricing from well-respected providers (Centers of Excellence).
The plan payment for any provider is capped at that reference price. A health plan might also choose to negotiate with that provider to accept that price (Direct Provider Contracting), or the health plan policy might be to have the member pay the balance bill if higher than the reference price.
Self-funding is not an answer for all employers. If you do choose to make that leap, or want to explore the opportunities, be sure to speak with an experienced professional. There is a lot of work to be done when moving in this direction and thorough education, preparation, and analysis is critical. Sherree Craig is certified in self-funding by the National Association of Health Underwriters.The NAHU Advanced Self-Funding Certification ensures knowledge of regulatory concerns, service model options, cost-containment strategies and underwriting concepts necessary for providing advice and direction on employer self-funded health plans.
Presented by Thomas C. Chester, CFP™, AIF®
Most working Americans have only one source of steady income before they retire: their jobs. When you retire, however, your income will likely come from a number of sources, such as retirement accounts, social security benefits, pensions, and part-time work. When deciding how to manage your various assets to ensure a steady retirement income stream, there are two main strategies to consider: the total return approach and the investment pool—or bucket—approach. The total return approach
With the total return approach, you invest your assets in a diversified portfolio of investments with varying potential for growth, stability, and liquidity. The percentage you allot to each type of investment depends on your asset allocation plan, time horizon, risk tolerance, need for income, and other goals.
The objective of your investment portfolio generally changes over time, depending on how close you are to retirement:
• Accumulation phase. During the accumulation phase, your portfolio’s objective is to increase in value as much as possible, with a focus on investments with growth potential.
• Approaching retirement-age phase. As you near retirement, your portfolio becomes more conservative, moving toward more stable and liquid assets in order to help preserve your earnings.
• Retirement phase. Once you retire, the idea is to withdraw from your portfolio at an even rate that allows you to enjoy a sustainable lifestyle.
Traditionally, a widely quoted withdrawal rate for the first year of retirement has been 4 percent. Ideally, that 4 percent should be equal to the amount left over after you subtract your yearly retirement income (e.g., pensions, social security, and so on) from your total cost of living, including investment management fees. Each year, you will most likely increase your withdrawal percentage to keep up with inflation. Keep in mind, however, that the appropriate withdrawal rate for you will depend on your personal situation as well as the current economic environment. The bucket approach
The bucket approach also begins with a diversified portfolio, following the total return approach throughout most of the accumulation period. Then, as retirement approaches, you divide your assets into several smaller portfolios (or buckets), each with different time horizons, to target specific needs.
There is no “right” number of buckets, but three is fairly common. In a three-bucket scenario:
• The first bucket would cover the three years leading up to retirement and the two years following retirement, providing income for near-term spending. It would likely include investments that have historically been relatively stable, such as short-term bonds, CDs, money market funds, and cash.
• The second bucket would be used in years three through nine of retirement. Designed to preserve some capital while generating retirement income, it would include more assets with growth potential, such as certain mutual funds and dividend-paying stocks.
• The third bucket, designated to provide income in year 10 and beyond, would contain investments that have the most potential for growth, such as equities, commodities, real estate, and alternatives. Although the risk profile of this bucket is typically higher than the other two, its longer time horizon can help provide a buffer for short-term volatility.
As you enter the distribution phase, you draw from these buckets sequentially, using a withdrawal rate based on your specific lifestyle goals in a particular year. The big picture
Many people are familiar with the total return approach, but the bucket approach has been gaining popularity recently, thanks in large part to its simplicity. It also accounts for different time periods during retirement, potentially allowing you to allocate money more effectively based on your personal situation.
Perhaps the greatest benefit of the bucket approach is that it can help provide a buffer during times of market volatility. For example, if the value of the investments in buckets two and three suddenly fluctuates due to market conditions, your immediate cash income is coming from bucket one, which is likely to be less volatile. This may also alleviate the need to sell investments that have lost money in order to generate retirement income.
Of course, while the bucket approach has its advantages, some investors simply feel more comfortable using the total return approach. Remember, the best strategy for your retirement is unique to you and your personal preferences and needs. However you choose to pursue your retirement dreams, it’s important to work with a financial professional who can help you create the most appropriate strategy based on your goals and situation.
Contact us today to learn more about the different paths you may take to pursue a sustainable and enjoyable retirement. Diversification does not assure against market loss, and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.
By Sarah Ruef-Lindquist, JD, CTFA
Beyond medical care, one of the few differences for how professionals approach women as compared to men is in the area of financial planning. Of course, this is has to do with differences largely beyond a woman’s control, but thoughtful recognition of the differences can have a tremendous impact on women’s financial lives.
One might assume that a longer average life expectancy – 6 years longer – for women is a good thing. It is, but you have to cover living expenses for those additional years.
When over your working years you have earned on average 79 cents for every dollar earned by your male counterpart, the challenge of paying for that longer life expectance grows. Lower earnings impact not only what one can set aside and save for retirement, but likely the amount contributed to retirement by an employer and the amount ultimately available from social security as well.
Combined with years out of the work force for child-rearing and/or caring for aged family members and you have the ‘perfect storm’ of inadequate resource to support a woman who will likely outlive a male spouse.
When advising women, we want to focus on several options, including elections that can be made on a spouse’s pension and maximizing benefits for them down the road. For instance, some couples may want to elect a higher immediately payout on retirement and forgo a future spousal benefit, but this is usually not a good idea for down the road when the surviving spouse- especially if her benefits alone are significantly lower and she is any number of years younger than her spouse, has less to live on. They will lose that income with the death of their spouse.
For widows or divorced women who were married at least 10 years to their spouse and have not remarried, we want to be sure they consider elections available to them as surviving or former spouses. Many divorced women learn that they are entitled to a social security amount, that though 50% of their ex spouse’s benefit, amount exceeds 100% of their own. Electing to receive the 50% spousal benefit in no way diminishes the ex-spouse’s benefit, but can improve their own income outlook for the rest of their lives.
Surviving spouses who do not remarry have several elections: Depending on their age and whether they are caring for a disabled child or a child age 16 or younger, they can elect current benefits as survivor, defer taking a higher benefit and continue working and even switch to a higher benefit at full retirement age or later. The optimal strategy will depend heavily on the need for income and health status. If one is in poor health, a common strategy is to begin benefits as early as possible to maximize how much is available before death. For a healthy spouse with a family history of longevity, a strategy to maximize the income over a long period of time may be preferable. Of course, this must be balanced with the need for income.
Women may have more years ahead than many men; careful planning can help the quality of those years. Of course, it’s always best to get advice from your financial advisor before making any decisions or changes in your financial plans. Talk through your options with a professional who knows your income and overall financial situation.
February is a month that always reminds me of falling in love…Valentine’s Day smack in the middle of the month, and I got married in March, and my husband’s birthday is in February, so it’s all about love, and falling in love. But this February has had a different kind of falling feeling in just the first week…the stock markets.
According to colleagues who research such things, the S&P 500 gained +5.7% (total return) in January 2018, the index’s 15th consecutive up month. This number of consecutive up months has only been achieved once before for the S&P 500, between March 1958 and May 1959. So perhaps not surprising that falling prices – even a 10% correction – could result in the first “down” month for the S&P 500 in the month of February 2018.
Even still, those same colleagues tell me that the S&P 500 has gained +10.1% per year (total return) over the 50-year period of 1968-2017 despite 7 bear markets – at least a 20% decline each time. To me, that demonstrates durability. Love it or hate it, the stock market is – so far in its history – durable, weathering depressions, recessions, war time, peace time, administrations stable and not-so-stable, reflecting the value of capital in our economy. Of course, this is no prediction of future results.
Some folks felt that the drop in market value in the past week on all indices meant it was time to go to cash or get out of the market. My advice? “Not so fast,” because how do you know when to get back into the market? Staying in cash means not only eroding purchasing power due to inflation (which is predicted my many to be increasing from historic lows), but potential for lost opportunity, the cost of not being invested, should the market improve.
Or course, it’s always best to get advice from your financial advisor before making any changes in your financial plans or investment strategy. Talk through your options with a professional who knows your goals and risk tolerance. And let’s remember to keep February about falling in love.
Jaime Hannan-McMurrin of Union has joined Allen Insurance and Financial as a processor in the company’s business insurance division. She is based in Camden.
Before coming to work for Allen Insurance and Financial, Hannan-McMurrin, a native of Warren, worked for a local bank and then a local insurance agency, gaining valuable account and customer service experience. She earned her Maine property & casualty insurance license in 2016.
Outside of work, Hannan-McMurrin enjoys spending time with her two daughters, especially when they are scrapbooking or taking a Zumba class.
“I love my job,” she said. “I work with great people, I find myself doing something different every day and every day is a challenge. I love the learning and opportunity to learn so much more.”
As 2017 draws to a close, it’s time to begin organizing your finances for the new year. To help you get started, we’ve put together a list of key planning topics to consider. Click to view our financial planning team page. Savings and investments
Revisit your retirement contributions. Review how much you’re contributing to your workplace retirement account. If you’re not taking full advantage of your employer’s match, it’s a great time to consider increasing your contribution. If you’ve already maxed out your match or your employer doesn’t offer one, boosting your contribution could still offer tax advantages. Now is also a good time to ensure that your portfolio allocation remains in line with your objectives. Anticipate Roth recharacterizations. If you converted a traditional IRA to a Roth IRA during 2017 and paid tax on the conversion, mark your calendar now to allow plenty of time to recharacterize (i.e., undo) the conversion if you need to. The deadline is your tax-filing deadline plus any extensions. Take stock of your goals. Did you set savings goals for 2017? Realistically evaluate how you did and think about your goals for next year. If you determine that you are off track, we’d be happy to help you develop and monitor a financial plan. Health and wellness
Spend your FSA dollars. If you have a flexible spending account (FSA), those funds may be forfeited if you don’t use them by year-end. (Some FSAs offer a 2.5-month grace period or the ability to carry over up to $500 into the next year; check with your employer to see if those options are available.) It’s also a good time to calculate your FSA allotment for next year, based on your current account excess or deficit.
If you’re not using an FSA, evaluate your qualifying health care costs to see if setting one up for 2018 would make sense. Taxes, taxes, taxes
Manage your marginal tax rate. If you’re on the threshold of a tax bracket, deferring income or accelerating deductions may help you reduce your tax exposure. It might make sense to defer some of your income to 2018 if doing so will put you in a lower tax bracket. Accelerating deductions, such as medical expenses or charitable contributions, into the current tax year (rather than paying for deductible items in 2018) may have the same effect. In addition, reviewing your capital gains and losses may reveal tax planning opportunities—for instance, harvesting losses to offset capital gains.
Here are a few key 2018 tax thresholds to keep in mind:
The 39.6-percent marginal tax rate affects those with taxable incomes in excess of $426,701 (individual), $480,051 (married filing jointly), $453,351 (head of household), and $240,026 (married filing separately).
The 20-percent capital gains tax rate applies to those in the 39.6-percent tax bracket.
Itemized deductions and personal exemption phaseouts affect those with adjusted gross incomes above $266,700 (individual) and $320,000 (married filing jointly).
The 3.8-percent surtax on investment income applies to the lesser of net investment income or the excess of modified adjusted gross income over $200,000 (individual) and $250,000 (married filing jointly).
Consider the benefits of charitable giving. Donating to charity is another good strategy for reducing taxable income. If you’d like to help a worthy cause while trimming your taxes, it’s worth exploring your charitable goals and various gifting alternatives. Make a strategy for stock options. If you hold stock options, now is a good time to make a strategy for managing current and future income. Consider the timing of a nonqualified stock option exercise. Would it make sense to avoid accelerating income into the current tax year, or defer income to future years, in light of your estimated tax picture? And don’t forget about the alternative minimum tax (AMT). If you’re considering exercising incentive stock options before year-end, have your tax advisor prepare an AMT projection to see if there’s any tax benefit to waiting until January of the following year. Plan for estimated taxes and RMDs. When considering your taxes for 2017, be sure to take any potentially large bonuses or a prosperous business year into account. You may have to file estimated taxes or increase the upcoming January payment. If you’re turning 70½, you’ll need a strategy for taking required minimum distributions (RMDs) from your traditional IRA and 401(k) plans. Adjust your withholding. If you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage of this is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. You can also use this strategy to make up for low or missing quarterly estimated tax payments. Proactive planning Review your estate documents. To help ensure that your estate plan stays in tune with your goals and needs, you should review and update it on an ongoing basis to account for any life changes or other circumstances. If you haven’t done so during 2017, take time to:
Check trust funding
Update beneficiary designations
Review trustee and agent appointments
Review provisions of powers of attorney and health care directives
Ensure that you fully understand all of your documents
